Understanding Economics (5)-Factors of Production |31 October 2007

In economics, factors of production refer to inputs involved (or required) in the process of producing goods or services.  These are generally grouped into four broad categories, namely land, labour, capital and entrepreneurship.

Land as a factor of production is essentially anything that occurs naturally that is used for the production of goods or services.  Hence, it encompasses the earth’s intrinsic nutrients and minerals, wildlife, vegetation and marine resources.  Normally, it would not be possible to engage in production if there were no such resources. 

Almost all nations are endowed with a particular natural resource.  This natural resource (or resources in some countries) is important for the country’s economic development.  In the case of Seychelles where resources such as gold and diamonds do not exist, other natural resources form the basis of its economic activity and eventually developments. As an example, the maritime resource provides the raw material, such as tuna, for eventual processing by the tuna canning factory, IOT.  In addition, the country’s exquisite beaches, flora (e.g. the coco-de-mer plant) and fauna are important in the development of the tourism industry. Whilst imperative, land as a factor of production on its own would not address all the production or manufacturing needs of a country.  Other elements are required to transform the raw materials into goods or services in a form that would as an example satisfy the needs of consumers. 

Labour is the contribution of mental and physical efforts of individuals to a production process; the human resource required to produce.  Therefore, whilst naturally tuna is available in the sea, in order to supply canned tuna locally or export it to other countries, someone needs to fish the tuna and do the necessary processing before canned tuna is available for consumption.  The same argument applies in the tourism sector where labour is required to provide quality service in the industry or to sell the country’s exquisite sites.

In the majority of cases, labour will participate in the production process for a reward in exchange of the service offered.  The reward are normally in the form of wages or salaries and would depend on a number of factors, with the main two being education (or training) and experience acquired.  Of note is that land would not earn a ‘reward’ in its own right but income such as rent is normally paid to owners of land.  In the long term, reward to labour is generally influenced by how productive the individual is, which in the short term would amongst other things normally depend on education, experience and motivation.

For a number of economic activities, especially manufacturing, a trained and motivated labour requires capital.  A worker on the IOT or Seybrew production line may indeed have the will to work but there is only so much that can be done in the absence of machineries, tins, bottles and so on. 

These all qualify as capital.  As a factor of production, capital refers to the man-made or synthetic goods whose fundamental role may be seen as complementary to the services offered by labour. 

Capital is unique in the sense that it is the sole factor of production which is created through the production process, meaning that input is processed into capital output which is subsequently used in another production process. 

To organise the afore-mentioned three factors of production require a special sort of human efforts or skills.  These are offered by a person who undertakes the risk of bringing together labour, land and capital to produce output.  This fourth factor of production or entrepreneurship is deemed by some as mere labour but many think the managerial and innovative qualities of entrepreneurship are distinct and thus deserve to be in a category of its own.  Often without someone to organise, and make sure that production processes are coordinated effectively, no output is obtained from the other three factors of production.  An entrepreneur could well be the managing director of a company or a small business owner.  Depending on the objective of the organisation, the reward to entrepreneurship varies; it could be survival, reputation or (a share of) profit.

There was an epoch when these factors were considered as strictly distinct for it was not the norm for labour to own capital, or for labour to own land.  In modern days, while distinct in their own rights, it is not unusual for an office worker to grow vegetables for sale or a teacher to rent a house in which case they are also entrepreneurs.  Thus, evolution has occurred over time but the basic concept of factors of production remains a fundamental economic principle.

Given the problem of limited resources (scarcity) and the competitive economic environment, there is an important need for efficient use of factors of production.  Different countries use the factors in different ways depending on their abundance.  For instance, in a populous country such as China, as much as possible, production would tend to be mainly labour intensive.  In addition, different production process may require a varied combination of the four factors of production whilst some others may not necessarily require all four.  In a nutshell, factors of production are allocated in such a way as to reap the benefits of absolute and comparative advantage which will be the subject matter of the next forthcoming article.

Contributed by the Central Bank of Seychelles. E-mail: cbs@seychelles.sc.